Fiat Chrysler Automobiles US Agrees to Plead Guilty and Pay $30 Million Criminal Fine for Conspiring to Make Illegal Payments to United Auto Workers Executives

In the latest chapter of the saga involving systematic corruption within the United Auto Workers (“UAW”) and Fiat Chrysler Automobiles (“FCA”), on January 27 the U.S. Attorney’s Office for the Eastern District of Michigan announced that FCA US LLC, the U.S. operating subsidiary of global automaker Stellantis, had been charged with and had agreed to plead guilty to conspiring to violate the Labor Management Relations Act (“Taft-Hartley Act”), by making illegal payments to UAW officers.

The U.S. Attorney’s Office stated that it had filed a criminal information against FCA.  The information charges FCA with conspiring with other entities and individuals to violate the Taft-Hartley Act by making more than $3.5 million in illegal payments to UAW officials from 2009 to 2016.  During the period of the conspiracy, FCA executives “engineered illegal payments” to UAW officials.  The categories of such payments included:

  • “[E]xtravagant meals, rounds of golf, lavish parties for the UAW International Executive Board, an Italian-made shotgun, clothing, designer shoes, and other personal items paid for with credit cards issued by” the UAW-Chrysler Skill Development & Training Program d/b/a the UAW-Chrysler National Training Center (NTC);
  • Payoff of the $262,000 home mortgage of former UAW Vice President General Holiefield;
  • Receipt by Holiefield and his widow of “hundreds of thousands of dollars directed through Holiefield’s purported charitable organization, as well as companies controlled by him which had contracts with the training center.”

The agreement between the Department and FCA is a plea agreement under Rule 11 of the Federal Rules of Criminal Procedure.  Unlike a Deferred Prosecution Agreement, under which a corporation may be required to pay a criminal penalty but does not have to plead guilty to criminal charges, a Rule 11 agreement with a corporate defendant contemplates that the corporation will enter a guilty plea in federal court and receive a criminal sentence from a federal district judge.  As of January 27, a guilty plea hearing had not yet been set, and the U.S. District Court in Detroit must still review and approve that agreement before imposing any sentence.

Under the terms of the agreement, FCA has agreed to pay a $30 million fine, to serve a three-year term of probation, and to have the U.S. government select an independent compliance monitor to oversee FCA’s adherence to federal labor laws during that three-year period.

Based on the collective press releases and agreements stemming from the Department’s investigation, the FCA resolution could be considered a logical counterpoint to the Justice Department’s December 14, 2020 agreement with the UAW concerning corruption at the highest levels of UAW management.  But those documents provide no explanation for how multiple FCA officials, over an eight-year period, could have conducted such systematic corruption despite the existence of legal and compliance teams within the company.

One indication of the weaknesses within FCA’s compliance program is the fact that FCA did not make clear in its Code of Conduct until 2018 that employees “have a duty to report violations of law, regulation or company policy.”  A more searching review of actions and decisions within FCA will be necessary for FCA to understand the full scope of its compliance failures, and for other companies to learn from those failures.

Saudi Arabia Conducts Crackdown on Intellectual Property Violations

In a recent article reviewing the state of intellectual property (IP) rights in the Middle East, one IP legal expert tactfully commented that the enforcement of IP rights “varies widely from country to country.”  Although the Gulf Cooperation Council member states are signatories to various IP-related international conventions, such as the Paris and Berne Conventions and the Agreement on Trade-Related Aspects of Intellectual Property (TRIPS), the transplantation of IP law into those countries has generally been a tortuous process in which active enforcement has played a fleeting role at best.

Recent events in Saudi Arabia, however, suggest that the Kingdom is taking IP enforcement seriously.  The Arab News reported that the Saudi Authority for Intellectual Property (SAIP) “has launched a campaign aimed at inspecting websites to verify their compliance with intellectual property systems and ensure they do not violate intellectual rights.”  That campaign has two elements: (1) viewing websites “that broadcast movies, sports matches and TV series and sell books”; and (2) conducting field inspections of stores in Riyadh, Jeddah. and Dammam.

The stated main goal of these inspection visits is to increase public awareness about the breach of intellectual properties.  Of the more than 355 websites visited, however, the SAIP found that 77 had violate intellectual property rights, and those sites were subsequently blocked.

In addition, during January 2021 the campaign resulted in the seizure of more than 11,620 items that violated creative rights, “including electronic goods, computer programs, sound recordings, and printed works.”  According to Yasser Al-Debassi, the SAIP’s Executive Director of Intellectual Property Respect and Enforcement, the SAIP’s approach was to apply the “mystery shopper” approach, in which SAIP inspectors acted as if they were shoppers while gathering information from markets and identifying the types of breaches and the methods used for IP piracy.  Then, as Al-Debassi put it, “we design plans and training programs to curb these practices.”

A single crackdown on IP violations, of course, is not a systematic program to enforce IP rights.  In mid-January, however, the SAIP also convened a National Committee for the Enforcement of Intellectual Property Rights in the Kingdom, which proposed national programs and initiatives to ensure the respect of IP rights, as well as the development of procedures for IP enforcement bodies.  Taken together, the Saudi crackdown approach and the SAIP’s action plan should serve as an example for other GCC nations that need to take IP enforcement more seriously.

South China Morning Post Investigation Details How “Consultants’” Assist Chinese Factory Owners to Evade Labor Laws

It is no surprise to companies with robust anti-bribery and anti-corruption programs that doing business in China poses high risks of bribery.  A variety of Foreign Corrupt Practices Act (FCPA) resolutions by the U.S. Department of Justice, as well as a bevy of Chinese prosecutions and convictions of senior officials and corporate executives, provide specific examples of long-running systemic corruption.  What is not always clear from most public reporting on corruption in China, however, are the deeply embedded institutional practices and techniques that contribute to the maintenance of systematic corruption.

A January 22 report in the South China Morning Post presents the result of a detailed investigation that examined the relationships between so-called “consultants” and factory owners in China.  These relationships involve “consultants” who advise factory owners on how to flout labor laws through various means.

One consultant told a Post reporter who was posing as a factory owner looking to sell goods to Western buyers, “As long as you cooperate, keep the troublemakers out of the factory on inspection day, and make sure workers follow our guidance on answering questions, we will guarantee you pass.”  Such consultants’ services reportedly range “from basic coaching of workers on how to answer auditors’ questions, to the provision of additional record books – such as a modified set for auditors claiming that all workers are paid in full, on time, and for any overtime worked.”

Other services that the consultants offer include:

  • Arranging “for a particularly friendly auditor to inspect, at a time of the factory owner’s choosing, to ensure that the facility is well-prepared.”
  • Using software “that can conjure up documents for a full team of seemingly legitimate factory workers and records in 90 seconds, including in cases where the actual workers are not of age or do not have the proper documentation, or where time sheets may not be kept, or may be in conflict with China’s labour laws.”  One Chinese consultant, “who documented his activity over 2016 and 2017 on a Chinese blogging site, fabricated an entire suite of documents on employee attendance, payroll and training for a paper-packaging factory in Dongguan.”  At another factor, the same consultant covered for underage workers by going to a nearby print shop “to doctor their identity cards before auditors could see them, telling the auditors that the previous employee list was an ‘input mistake’.”
  • Bringing auditors “to a ‘show factory’ – someone else’s plant that is more likely to meet Western-set standards,” or erecting temporary walls in factories to conceal deficiencies.

The most common practice described in the Post investigation, however, was bribery.  Each of five Chinese consulting firms that the Post interviewed stated that “a bribe would be necessary to pay off the auditor – many of which are from well-known international companies – and get access to accredited platforms that could open doors to supplying some of the world’s top brands.”  A representative of one such consultant said that “For auditors from one firm, you give them a red packet stuffed with cash on the inspection day. Auditors from another firm dare not take the red packet at the scene, so we would transfer the money to them one week before inspection day.”

A variant of this practice, according to a Hong Kong-based supply chain consultant, is for the auditor to tell the factory owner, “’I have forgotten my watch, a Rolex, in your factory – once you return it to me, I will ensure that your factory passes’.”

The Post report also suggests that one factor that may contribute to the growth of these
consultants is the growth of audit-sharing platforms.  These platforms, which “allow member companies to share data on ethical standards at thousands of factories globally,” “are commonly used by brands to minimise audit duplication and improve conditions across the supply chain.”

Although a large company may request that a platform accredit a particular supplier, the platform operators do not conduct the audits themselves, but have a third-party auditor conducts the inspection.  “[I]f the factory passes, the supplier is accredited and uploaded to the platform for one or two years. This opens the door to hundreds of potential buyers – each of which can commission spot-check audits to confirm the inspection is legitimate, but industry sources say these checks are not done as commonly as they should be.”

The Post also reported that a database of more than 5,000 audits conducted in China in 2020 showed that more than 90 per cent of factories audited by third-party auditors for one well-known set of platforms “were not transparent in their documentation and had falsified record-keeping for worker pay, working hours and overtime, suggesting they pose a greater risk of cheating on inspections.”

Although fraudulent documentation and corruption are known to be longstanding problems in China, the Post report should prompt companies depending on Chinese factories’ production of goods to revisit their supply-chain due diligence processes, and to scrutinize any audits that provide positive inspection reports.  In many cases, the practices that the report describes result in “production-line workers enduring marathon shifts without being paid properly, working for weeks on end without a day off, and not being given insurance coverage as required by Chinese law.”  Companies that turn a blind eye to these kinds of abuses risk violating not only labor laws, but anti-bribery and corruption laws in China and other countries.

First Circuit Court of Appeals Rejects Trump Administration Reading of Wire Act

In the U.S. Department of Justice’s toolbox for combating organized crime, one of the oldest (and least used) tools is the federal criminal offense known as the Wire Act.  The Act makes it a felony for anyone,

being engaged in the business of betting or wagering knowingly uses a wire communication facility for the transmission in interstate or foreign commerce of bets or wagers or information assisting in the placing of bets or wagers on any sporting event or contest, or for the transmission of a wire communication which entitles the recipient to receive money or credit as a result of bets or wagers, or for information assisting in the placing of bets or wagers . . . .

Originally intended to attack organized crime’s involvement in interstate bookmaking and sports betting, the Wire Act became a subject of interest to some Members of Congress who perceived it as a potential vehicle to address Internet gambling.  A 2011 opinion by the U.S. Department of Justice’s Office of Legal Counsel (OLC) sought to put that broad construction to rest. It concluded that the Wire Act did not apply to Internet and out-of-state sales of lottery tickets because those sales did not involve sporting events or contests.

In 2018, however, the OLC effectively overruled its 2011 opinion with a new opinion that concluded, based on a crabbed reading of the Act’s text, that the Act’s prohibitions “are not uniformly limited to gambling on sporting events or contests.”  This opinion immediately called into question the legality of state lotteries operating online.  Even as the Justice Department twice extended the forbearance period for enforcement of the Wire Act, in 2019 the U.S. District Court for the District of New Hampshire held, in a legal challenge by the New Hampshire Lottery Commission and one of its vendors, that the Wire Act’s ambit was limited to sports gambling.

On January 20, a panel of the U.S. Court of Appeals for the First Circuit affirmed the District Court’s ruling, holding that the Act’s prohibitions “apply only to the interstate transmission of wire communications related to any ‘sporting event or contest.’”  After determining that the Commission had standing to bring the lawsuit and that the issue was ripe for judicial resolution, the Court stated that “the text of section 1084 [is] not entirely clear on the matter at hand,” and found “that the government’s resolution of the Wire Act’s ambiguity would lead to odd and seemingly inexplicable results.”  It further noted that “the legislative history contains strong indications that Congress did indeed train its efforts solely on sports gambling.”

Although the First Circuit’s decision does not bind other circuits, its analysis of the Act and its legislative history appears sound and therefore would carry substantial weight in other federal courts.  Moreover, the Justice Department in the Biden Administration is unlikely to petition for certiorari to the U.S. Supreme Court, thereby bringing the litigation to an end.  At some later date, the Department is also likely to have OLC revisit the issue, which could lead to withdrawal of the 2018 OLC opinion and reinstatement of the 2011 opinion as the official guidance for federal departments.

For those reasons, the First Circuit opinion should provide substantial comfort for state lotteries conducting online sales.

United Arab Emirates Takes Steps to Counter Money Laundering

Over the past year, the United Arab Emirates has been the focus of sustained public criticism for failure to adopt and implement effective anti-money laundering (AML) measures.  For example, in April 2020, the Financial Action Task Force (FATF) issued a Mutual Evaluation Report that acknowledged “significant improvements” that the UAE had made to its AML/Counter Terrorist Financing (CFT) system in recent years, but also noted that “[t]he risk of criminals being able to misuse legal persons in the UAE for ML/TF remains high” and deemed it “a major concern that the UAE authorities do not recognise the importance of using the full range of sanctions (particularly fines and barring orders) to create a dissuasive environment.”

More recently, the United Kingdom’s Treasury and Home Office issued a national risk assessment on money laundering and terrorist financing that described the UAE as “an attractive location for those who also wish to launder the proceeds of crime from abroad – overwhelmingly foreign nationals using UAE systems, rather than Emirati nationals themselves.”  It credited the UAE with “continu[ing] to enact its programme of reforms to improve its AML/CTF regime in line with FATF’s recommended actions.” At the same time, it stated that the deficiencies that FATF identified “expose the UAE, and other countries, to abuse by international controller networks which continue to launder the proceeds of crime to and from countries including the UK.”

In the face of these criticisms, in the last four months the UAE has taken additional steps to improve its AML/CFT regime.  First, on September 25, 2020 the UAE central bank stated that “[t]o mitigate the risk of financial crimes . . . banks are urged to put more efforts toward combating money laundering and financing of terrorism.”

Second, on November 24, the UAE Ministry of Economy announced the development of a strategic plan to support efforts to combat money laundering practices within the UAE, as well as the establishment of an Anti-Money Laundering Department within the Ministry.

Third, the UAE Minister of Justice issued a series of ministerial resolutions to set up special federal courts in four emirates to handle money laundering cases.  Each court reportedly will have minor, major, and appeals circuits to hear money laundering crimes.

Fourth, the Minister of Justice also announced that 200 law firms in the UAE had failed to comply with AML procedures and were suspended from practicing for one month. Those suspensions were to be lifted once those firms fulfilled their obligations.  Seven other law firms were also fined AED 100,000 (US $27,229) each for AML violations.

These measures indicate that the UAE appears to be making genuine efforts to improve its AML/CFT system.  The UAE will need to sustain that commitment in the coming year to continue to bring that system to maturity.